CHAPTER 10
FIXED ASSETS AND INTANGIBLE ASSETS
EYE OPENERS
1. a. Tangible
b. Capable of repeated use in the
operations of the business
e. Long-lived
2. a. Property, plant, and equipment
b. Current assets (merchandise inventory)
3. Real estate acquired as speculation should
be listed in the balance sheet under the
caption “Investments,” below the Current
Assets section.
4. $298,500
5. Capital expenditures include the cost of
acquiring fixed assets and the cost of
improving an asset. These costs are
recorded by increasing (debiting) the fixed
asset account. Capital expenditures also
include the costs of extraordinary repairs,
which are recorded by decreasing (debiting)
the asset’s accumulated depreciation
account. Revenue expenditures are
recorded as expenses and are costs that
benefit only the current period and are
incurred for normal maintenance and repairs
of fixed assets.
6. Capital expenditure
7. A capital lease is accounted for as if the
lessee has purchased the asset and the
asset is written off over its useful life. An
operating lease is accounted for as a
current-period expense (rent expense).
8. Ordinarily not; if the book values closely
approximate the market values of fixed
assets, it is coincidental.
9. a. No, it does not provide a special cash
fund for the replacement of assets.
Unlike most expenses, however,
depreciation expense does not require
an equivalent outlay of cash in the
period to which the expense is
allocated.
b. Depreciation is the cost of fixed assets
periodically charged to revenue over
their expected useful lives.
10. 12 years
581
11. a. No
b. No
12. a. An accelerated depreciation method is
most appropriate for situations in which
the decline in productivity or earning
power of the asset is proportionately
greater in the early years of use than in
later years, and the repairs tend to
increase with the age of the asset.
b. An accelerated depreciation method re-
duces income tax payable to the IRS in
the earlier periods of an asset’s life.
Thus, cash is freed up in the earlier
periods to be used for other business
purposes.
c. MACRS was enacted by the Tax
Reform Act of 1986 and provides for
depreciation for fixed assets acquired
after 1986.
13. No. Financial Accounting Standards No.
154, “Accounting Changes and Error
Corrections,” is quite specific about the
treatment of changes in depreciable assets’
estimated service lives. Such changes
should be reflected in the amounts for
depreciation expense in the current and
future periods. The amounts recorded for
depreciation expense in the past are not
affected.
14. a. No, the accumulated depreciation for an
asset cannot exceed the cost of the
asset. To do so would create a negative
book value, which is meaningless.
b. The cost and accumulated depreciation
should be removed from the accounts
when the asset is no longer useful and
is removed from service. Presumably,
the asset will then be sold, traded in, or
discarded.
15. a. Over the shorter of its legal life or years
of usefulness.
b. Expense as incurred.
c. Goodwill should not be amortized, but
written down when impaired.
 PRACTICE EXERCISES

PE 10–1A

May 27 Accumulated Depreciation—Delivery Van........ 950

Cash.................................................................. 950
27 Delivery Van.......................................................... 450
Cash.................................................................. 450

PE 10–1B

Oct. 9 Delivery Truck....................................................... 1,150

Cash.................................................................. 1,150
9 Repairs and Maintenance Expense.................... 40
Cash.................................................................. 40

PE 10–2A

a. $410,000 ($485,000 – $75,000)

b. 4% = (1/25)
c. $16,400 ($410,000 × 4%), or ($410,000/25 years)

PE 10–2B

a. $120,000 ($125,000 – $5,000)

b. 12.5% = (1/8)
c. $15,000 ($120,000 × 12.5%), or ($120,000/8 years)

PE 10–3A

a. $99,000 ($134,000 – $35,000)

b. $0.33 per mile ($99,000/300,000 miles)
c. $17,160 (52,000 miles × $0.33)
PE 10–3B

a. $80,000 ($95,000 – $15,000)

b. $2.00 per hour ($80,000/40,000 hours)
c. $10,200 (5,100 hours × $2.00)

PE 10–4A

a. 5% = [(1/40) × 2]
b. $32,500 ($650,000 × 5%)

PE 10–4B

a. 40% = [(1/5) × 2]
b. $58,000 ($145,000 × 40%)

PE 10–5A

a. $12,000 [($250,000 – $34,000)/18]

b. $130,000 [$250,000 – ($12,000 × 10)]
c. $15,500 [($130,000 – $6,000)/8]

PE 10–5B

a. $8,125 [($80,000 – $15,000)/8]

b. $47,500 [$80,000 – ($8,125 × 4)]
c. $7,500 [($47,500 – $10,000)/5]
PE 10–6A

a. $81,000 = $324,000 × [(1/8) × 2)] = $324,000 × 25%

b. $17,750 gain, computed as follows:

Cost...................................................... $324,000
Less: First-year depreciation............ (81,000)
Second-year depreciation....... (60,750) [($324,000 – $81,000) × 25%]
Book value at end of second year.... $182,250
Gain on sale ($200,000 – $182,250) = $17,750

c. Cash.................................................................................. 200,000
Accumulated Depreciation—Equipment...................... 141,750
Equipment................................................................... 324,000
Gain on Sale of Equipment....................................... 17,750

PE 10–6B

a. $9,500 [($160,000 – $17,500)/15]

b. $13,000 loss {$90,000 – [$160,000 – ($9,500 × 6)]}

c. Cash.................................................................................. 90,000
Accumulated Depreciation—Equipment...................... 57,000
Loss on Sale of Equipment............................................ 13,000
Equipment................................................................... 160,000
PE 10–7A

a. $0.60 per ton = $120,000,000/200,000,000 tons

b. $18,693,000 = (31,155,000 tons × $0.60 per ton)

c. Dec. 31 Depletion Expense........................................ 18,693,000

Accumulated Depletion........................... 18,693,000
Depletion of mineral deposit.

PE 10–7B

a. $0.40 per ton = $50,000,000/125,000,000 tons

b. $16,954,000 = (42,385,000 tons × $0.40 per ton)

c. Dec. 31 Depletion Expense........................................ 16,954,000
Accumulated Depletion........................... 16,954,000
Depletion of mineral deposit.

PE 10–8A

a. Dec. 31 Loss from Impaired Goodwill....................... 500,000

Goodwill.................................................... 500,000
Impaired goodwill.

b. Dec. 31 Amortization Expense—Patents.................. 24,250

Patents...................................................... 24,250
Amortized patent rights
[($388,000/8) × 6/12].

PE 10–8B

a. Dec. 31 Loss from Impaired Goodwill....................... 875,000

Goodwill.................................................... 875,000
Impaired goodwill.

b. Dec. 31 Amortization Expense—Patents.................. 18,750

Patents...................................................... 18,750
Amortized patent rights
[($425,000/17) × 9/12].
 EXERCISES

Ex. 10–1

a. New printing press: 1, 2, 3, 4, 6

b. Used printing press: 7, 8, 9, 11

Ex. 10–2

a. Yes. All expenditures incurred for the purpose of making the land suitable for
its intended use should be debited to the land account.

b. No. Land is not depreciated.

Ex. 10–3

Initial cost of land ($30,000 + $270,000).................... $300,000

Plus: Legal fees........................................................... $ 1,425
Delinquent taxes................................................ 12,000
Demolition of building...................................... 18,500 31,925
$331,925
Less: Salvage of materials.......................................... 4,500
Cost of land................................................................... $327,425

Ex. 10–4

Capital expenditures: 1, 2, 4, 5, 6, 8, 10
Revenue expenditures: 3, 7, 9

Ex. 10–5

Capital expenditures: 2, 4, 6, 7, 8, 9
Revenue expenditures: 1, 3, 5, 10
Ex. 10–6

Feb. 16 Accumulated Depreciation—Delivery Truck..... 3,150

Cash.................................................................. 3,150

July 15 Delivery Truck....................................................... 1,100

Cash.................................................................. 1,100

Oct. 3 Repairs and Maintenance Expense.................... 72

Cash.................................................................. 72

Ex. 10–7

a. No. The $3,175,000 represents the original cost of the equipment. Its
replacement cost, which may be more or less than $3,175,000, is not reported
in the financial statements.

b. No. The $2,683,000 is the accumulation of the past depreciation charges on

the equipment. The recognition of depreciation expense has no relationship
to the cash account or accumulation of cash funds.

Ex. 10–8

(a) 50% (1/2), (b) 12.5% (1/8), (c) 10% (1/10), (d) 5% (1/20), (e) 4% (1/25), (f) 2.5%
(1/40), (g) 2% (1/50)

Ex. 10–9

$3,350 [($93,750 – $10,000)/25]

Ex. 10–10
$145,000  $7,000
75,000 hours
= $1.84 depreciation per hour

150 hours at $1.84 = $276 depreciation for July

Ex. 10–11

a. Depreciation per Rate per Mile:

Truck #1 ($50,000 – $6,500)/150,000 = $0.29

Truck #2 ($72,900 – $9,900)/300,000 = $0.21
Truck #3 ($38,000 – $3,000)/200,000 = $0.175
Truck #4 ($90,000 – $13,000)/200,000 = $0.385
Credit to
Accumulated
Truck No. Rate per Mile Miles Operated Depreciation
1 29.0 cents 23,000 $ 6,670
2 21.0 25,000 3,000*
3 17.5 36,000 6,300
4 38.5 40,000 15,400
Total................................................................................................ $ 31,370
*Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $3,000,
which reduces the book value of the truck to $9,900, its residual value.

b. Depreciation Expense—Trucks..................................... 31,370

Accumulated Depreciation—Trucks........................ 31,370
Truck depreciation.

Ex. 10–12

First Year Second Year

a. 5% of $75,000 = $3,750 5% of $75,000 = $3,750

or or

($75,000/20) = $3,750 ($75,000/20) = $3,750

b. 10% of $75,000 = $7,500 10% of ($75,000 – $7,500) = $6,750

Ex. 10–13

a. 12 1/2% of ($172,000 – $20,000) = $19,000 or [($172,000 – $20,000)/8]

b. Year 1: 25% of $172,000 = $43,000

Year 2: 25% of ($172,000 – $43,000) = $32,250
Ex. 10–14

a. Year 1: 3/12 × [($85,000 – $5,000)/10] = $2,000

Year 2: ($85,000 – $5,000)/10 = $8,000

b. Year 1: 3/12 × 20% of $85,000 = $4,250

Year 2: 20% of ($85,000 – $4,250) = $16,150

Ex. 10–15

a. $17,500 [($1,050,000 – $420,000)/36]

b. $700,000 [$1,050,000 – ($17,500 × 20 yrs.)]

c. $20,000 [($700,000 – $300,000)/20 yrs.]

Ex. 10–16

a. Mar. 30 Carpet.............................................................. 12,000

Cash........................................................... 12,000

b. Dec. 31 Depreciation Expense................................... 600

Accumulated Depreciation...................... 600
Carpet depreciation
[($12,000/15 years) × 9/12].
Ex. 10–17
a. Cost of equipment...................................................................... $504,000
Accumulated depreciation at December 31, 2010
(4 years at $38,500* per year).............................................. 154,000
Book value at December 31, 2010............................................ $350,000
*($504,000 – $42,000)/12 = $38,500

b. (1) Depreciation Expense—Equipment....................... 9,625

Accumulated Depreciation—Equipment.......... 9,625
Truck depreciation ($38,500 × 3/12 = $9,625).
(2) Cash........................................................................... 315,000
Accumulated Depreciation—Equipment............... 163,625*
Loss on Sale of Equipment..................................... 25,375
Equipment............................................................ 504,000
*($154,000 + $9,625 = $163,625)
Ex. 10–18

a. 2007 depreciation expense: $29,250 [($265,500 – $31,500)/8]

2008 depreciation expense: $29,250
2009 depreciation expense: $29,250

b. $177,750 [$265,500 – ($29,250 × 3)]

c. Cash.................................................................................. 168,500
Accumulated Depreciation—Equipment...................... 87,750
Loss on Disposal of Fixed Assets................................ 9,250
Equipment................................................................... 265,500
d. Cash.................................................................................. 180,000
Accumulated Depreciation—Equipment...................... 87,750
Equipment................................................................... 265,500
Gain on Sale of Equipment....................................... 2,250

Ex. 10–19

a. $16,200,000/90,000,000 tons = $0.18 depletion per ton

13,750,000 × $0.18 = $2,475,000 depletion expense
b. Depletion Expense.......................................................... 2,475,000
Accumulated Depletion............................................. 2,475,000
Depletion of mineral deposit.

Ex. 10–20

a. ($750,000/15) + ($90,000/12) = $57,500 total patent expense

b. Amortization Expense—Patents.................................... 57,500

Patents........................................................................ 57,500
Amortized patent rights ($50,000 + $7,500).
Ex. 10–21

a. Property, Plant, and Equipment (in millions):

Current Preceding
Year Year
Land and buildings..................................................... $ 626 $ 361
Machinery, equipment, and internal-use software.. 595 470
Office furniture and equipment................................. 94 81
Other fixed assets related to leases......................... 760 569
$2,075 $1,481
Less accumulated depreciation................................ 794 664
Book value................................................................... $1,281 $ 817
A comparison of the book values of the current and preceding years
indicates that they increased. A comparison of the total cost and
accumulated depreciation reveals that Apple purchased $594 million ($2,075
– $1,481) of additional fixed assets, which was offset by the additional
depreciation expense of $130 million ($794 – $664) taken during the current
year.

b. The book value of fixed assets should normally increase during the year.
Although additional depreciation expense will reduce the book value, most
companies invest in new assets in an amount that is at least equal to the
depreciation expense. However, during periods of economic downturn,
companies purchase fewer fixed assets, and the book value of their fixed
assets may decline.

Ex. 10–22
1. Fixed assets should be reported at cost and not replacement cost.

2. Land does not depreciate.

3. Patents and goodwill are intangible assets that should be listed in a separate
section following the Fixed Assets section. Patents should be reported at
their net book values (cost less amortization to date). Goodwill should not be
amortized, but should be only written down upon impairment.
Appendix 1 Ex. 10–23
N(N + 1) 20(20 + 1)
Sum of Years of Useful Life = = = 210
2 2

First year: 20/210 × $75,000 = $7,143

Second year: 19/210 × $75,000 = $6,786

Appendix 1 Ex. 10–24

N(N + 1) 8(8 + 1)
Sum of Years of Useful Life = = = 36
2 2

First year: 8/36 × ($172,000 – $20,000) = $33,778

Second year: 7/36 × ($172,000 – $20,000) = $29,556

Appendix 1 Ex. 10–25

N(N + 1) 10(10 + 1)
Sum of Years of Useful Life = = = 55
2 2

First year: 3/12 × 10/55 × ($85,000 – $5,000) = $3,636

Second year:
[(9/12 × 10/55 × ($85,000 – $5,000)] + [(3/12 × 9/55 × ($85,000 – $5,000)] =
$10,909 + $3,273 = $14,182

Appendix 2 Ex. 10–26

a.
Price (fair market value) of new equipment....................................... $300,000
Trade-in allowance of old equipment................................................. 120,000
Cash paid on the date of exchange.................................................... $180,000

b.
Price (fair market value) of new equipment..................... $300,000
Less assets given up in exchange:
Book value of old equipment...................................... $115,500
Cash paid on the exchange........................................ 180,000 295,500
Gain on exchange of equipment....................................... $ 4,500
Appendix 2 Ex. 10–27

a.
Price (fair market value) of new equipment....................................... $300,000
Trade-in allowance of old equipment................................................. 120,000
Cash paid on the date of exchange.................................................... $180,000

b.
Price (fair market value) of new equipment........................ $300,000
Less assets given up in exchange:
Book value of old equipment........................................ $127,750
Cash paid on the exchange........................................... 180,000 307,750
Loss on exchange of equipment.......................................... $ 7,750

Appendix 2 Ex. 10–28

a. Depreciation Expense—Equipment.............................. 15,000
Accumulated Depreciation—Equipment................. 15,000
Equipment depreciation ($20,000 × 9/12).

b. Accumulated Depreciation—Equipment...................... 235,000

Equipment........................................................................ 462,000
Loss on Exchange of Fixed Assets.............................. 5,000
Equipment................................................................... 336,000
Cash............................................................................ 366,000

Appendix 2 Ex. 10–29

a. Depreciation Expense—Trucks..................................... 4,000

Accumulated Depreciation—Trucks........................ 4,000
Truck depreciation ($16,000 × 3/12).

b. Accumulated Depreciation—Trucks............................. 68,000

Trucks............................................................................... 150,000
Trucks......................................................................... 96,000
Cash............................................................................ 120,000
Gain on Exchange of Fixed Assets......................... 2,000
Ex. 10–30
Revenue
a. Fixed Asset Turnover Ratio = Average Book Value of Fixed Assets

$93,469
Fixed Asset Turnover Ratio =
($85,294 + $82,356)/2

Fixed Asset Turnover Ratio = 1.12

b. Verizon earns $1.12 revenue for every dollar of fixed assets. This is a low
fixed asset turnover ratio, reflecting the high fixed asset intensity in a
telecommunications company. The industry average fixed turnover ratio is
slightly lower at 1.10. Thus, Verizon is using its fixed assets slightly more
efficiently than the industry as a whole.

Ex. 10–31

a. Best Buy: 12.72 ($35,934/$2,825)

Circuit City Stores, Inc.: 14.13 ($12,430/$880)

b. Circuit City’s fixed asset turnover ratio of 14.13 is higher than Best Buy’s
fixed asset turnover ratio of 12.72. Thus, Circuit City is generating $1.41
($14.13 – $12.72) more revenue for each dollar of fixed assets than is Best
Buy. On this basis, Circuit City is managing its fixed assets slightly more
efficiently than is Best Buy.
 PROBLEMS

Prob. 10–1A

1.
Land Other
Item Land Improvements Building Accounts
a. $ 4,000
b. 400,000
c. 2,500
d. 31,750
e. $ 36,000
f. 10,000
g. (3,000)*
h. 15,200
i. 5,400
j. $(600,000)*
k. 9,000
l. 3,000
m. 1,800
n. $ 12,000
o. 14,500
p. 33,000
q. (4,500)*
r. 700,000
s. (450)*
2. $469,450 $ 26,500 $773,950
*Receipt

3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to
provide services as time passes and are therefore depreciated.
Prob. 10–2A

Depreciation Expense
a. Straight- b. Units-of- c. Double-
Line Production Declining-Balance
Year Method Method Method
2009 $ 86,000 $129,000 $190,000
2010 86,000 107,500 95,000
2011 86,000 60,200 47,500
2012 86,000 47,300 11,500*
Total $344,000 $344,000 $344,000
Calculations:
Straight-line method:
($380,000 – $36,000)/4 = $86,000 each year
Units-of-production method:
($380,000 – $36,000)/8,000 hours = $43 per hour
2009: 3,000 hours @ $43 = $129,000
2010: 2,500 hours @ $43 = $107,500
2011: 1,400 hours @ $43 = $60,200
2012: 1,100 hours @ $43 = $47,300
Double-declining-balance method:
2009: $380,000 × 50% = $190,000
2010: ($380,000 – $190,000) × 50% = $95,000
2011: ($380,000 – $190,000 – $95,000) × 50% = $47,500
2012: ($380,000 – $190,000 – $95,000 – $47,500 – $36,000*) = $11,500
*Book value should not be reduced below the residual value of $36,000.
Prob. 10–3A
a. Straight-line method:
2008: [($48,600 – $3,000)/3] × 1/2................................................ $ 7,600
2009: ($48,600 – $3,000)/3............................................................ 15,200
2010: ($48,600 – $3,000)/3............................................................ 15,200
2011: [($48,600 – $3,000)/3] × 1/2................................................ 7,600

b. Units-of-production method:
2008: 1,800 hours @ $6.08*.......................................................... $10,944
2009: 2,600 hours @ $6.08........................................................... 15,808
2010: 2,000 hours @ $6.08........................................................... 12,160
2011: 1,100 hours @ $6.08........................................................... 6,688
*($48,600 – $3,000)/7,500 hours = $6.08 per hour

c. Double-declining-balance method:
2008: $48,600 × 2/3 × 1/2.............................................................. $16,200
2009: ($48,600 – $16,200) × 2/3.................................................... 21,600
2010: ($48,600 – $16,200 – $21,600) × 2/3................................... 7,200
2011: ($48,600 – $16,200 – $21,600 – $7,200 – $3,000*)............ 600
*Book value should not be reduced below $3,000, the residual value.
Prob. 10–4A

1.
Accumulated
Depreciation Depreciation, Book Value,
Year Expense End of Year End of Year
a. 1 $33,300* $ 33,300 $110,700
2 33,300 66,600 77,400
3 33,300 99,900 44,100
4 33,300 133,200 10,800
*[($144,000 – $10,800)/4]
b. 1 $72,000 [$144,000 × (1/4) × 2] $ 72,000 $72,000
2 36,000 [$72,000 × (1/4) × 2] 108,000 36,000
3 18,000 [$36,000 × (1/4) × 2] 126,000 18,000
4 7,200 [$144,000 – $126,000 – $10,800] 133,200 10,800

2. Cash.................................................................................. 19,750
Accumulated Depreciation—Equipment...................... 126,000
Equipment................................................................... 144,000
Gain on Sale of Equipment....................................... 1,750*
*($19,750 – $18,000)

3. Cash.................................................................................. 14,900
Accumulated Depreciation—Equipment...................... 126,000
Loss on Sale of Equipment............................................ 3,100*
Equipment................................................................... 144,000
*($18,000 – $14,900)
Prob. 10–5A
2008
Jan. 7 Delivery Equipment....................................................... 45,600
Cash........................................................................... 45,600

Feb. 27 Truck Repair Expense................................................... 130

Cash........................................................................... 130

Dec. 31 Depreciation Expense—Delivery Equipment.............. 11,400

Accumulated Depreciation—Delivery Equipment 11,400
Delivery equipment depreciation
[$45,600 × (1/8 × 2)].

2009
Jan. 8 Delivery Equipment....................................................... 75,000
Cash........................................................................... 75,000

Mar. 13 Truck Repair Expense................................................... 200

Cash........................................................................... 200

Apr. 30 Depreciation Expense—Delivery Equipment.............. 2,850

Acc. Depreciation—Delivery Equipment............... 2,850
Delivery equipment depreciation
[$45,600 – $11,400 × (1/8 × 2) × 4/12].
30 Acc. Depreciation—Delivery Equipment..................... 14,250
Cash................................................................................. 30,000
Loss on Sale of Delivery Equipment........................... 1,350
Delivery Equipment.................................................. 45,600

Dec. 31 Depreciation Expense—Delivery Equipment.............. 15,000

Acc. Depreciation—Delivery Equipment............... 15,000
Delivery equipment depreciation
[($75,000 × (1/10 × 2)].
Prob. 10–5A Concluded
2010
July 1 Delivery Equipment.............................................. 82,000
Cash.................................................................. 82,000

Oct. 4 Depreciation Expense—Delivery Equipment.... 9,000

Acc. Depreciation—Delivery Equipment...... 9,000
Delivery equipment depreciation
[$75,000 – $15,000 × (1/10 × 2) × 9/12].
4 Cash....................................................................... 53,000
Acc. Depreciation—Delivery Equipment........... 24,000
Delivery Equipment........................................ 75,000
Gain on Sale of Delivery Equipment............. 2,000

Dec. 31 Depreciation Expense—Delivery Equipment.... 8,200

Acc. Depreciation—Delivery Equipment...... 8,200
Delivery equipment depreciation
[$82,000 × (1/10 × 2) × 6/12].
Prob. 10–6A

1. a. Loss on impairment of goodwill, $20,000,000

b. $675,000/10 years = $67,500; 1/2 of $67,500 = $33,750
c. $1,665,000/9,000,000 board feet = $0.185 per board foot; 2,400,000 board
feet × $0.185 per board foot = $444,000

2. a. Loss on Impairment of Goodwill.............................. 20,000,000

Goodwill................................................................ 20,000,000
b. Amortization Expense—Patents.............................. 33,750
Patents................................................................... 33,750
Patent amortization.
c. Depletion Expense..................................................... 444,000
Accumulated Depletion....................................... 444,000
Depletion of timber rights.
Prob. 10–1B

1.
Land Other
Item Land Improvements Building Accounts
a. $ 1,500
b. 300,000
c. 20,000
d. 5,000
e. (3,600)*
f. 15,800
g. $ 4,200
h. 17,500
i. 18,000
j. $(750,000)*
k. 4,500
l. $15,000
m. 9,000
n. 1,100
o. 1,500
p. (6,000)*
q. 800,000
r. 45,000
s. (350)*
2. $356,200 $ 25,100 $866,850
*Receipt

3. Since land used as a plant site does not lose its ability to provide services, it
is not depreciated. However, land improvements do lose their ability to
provide services as time passes and are therefore depreciated.
Prob. 10–2B

Depreciation Expense
a. Straight- b. Units-of- c. Double-
Line Production Declining-Balance
Year Method Method Method
2008 $ 21,000 $ 30,240 $ 45,000
2009 21,000 22,680 15,000
2010 21,000 10,080 3,000
Total $ 63,000 $ 63,000 $ 63,000
Calculations:
Straight-line method:
($67,500 – $4,500)/3 = $21,000 each year
Units-of-production method:
($67,500 – $4,500)/25,000 hours = $2.52 per hour
2008: 12,000 hours @ $2.52 = $30,240
2009: 9,000 hours @ $2.52 = $22,680
2010: 4,000 hours @ $2.52 = $10,080
Double-declining-balance method:
2008: $67,500 × 2/3 = $45,000
2009: ($67,500 – $45,000) × 2/3 = $15,000
2010: ($67,500 – $45,000 – $15,000 – $4,500*) = $3,000
*Book value should not be reduced below the residual value of $4,500.
Prob. 10–3B

a. Straight-line method:
2008: [($15,660 – $600)/3] × 1/2.................................................. $2,510
2009: ($15,660 – $600)/3............................................................. 5,020
2010: ($15,660 – $600)/3............................................................. 5,020
2011: [($15,660 – $600)/3] × 1/2.................................................. 2,510

b. Units-of-production method:
2008: 3,750 hours @ $0.80*........................................................ $3,000
2009: 7,500 hours @ $0.80......................................................... 6,000
2010: 5,000 hours @ $0.80......................................................... 4,000
2011: 2,575 hours @ $0.80......................................................... 2,060

*($15,660 – $600)/18,825 hours = $0.80 per hour

c. Double-declining-balance method:
2008: $15,660 × 2/3 × 1/2............................................................. $5,220
2009: ($15,660 – $5,220) × 2/3.................................................... 6,960
2010: ($15,660 – $5,220 – $6,960) × 2/3..................................... 2,320
2011: ($15,660 – $5,220 – $6,960 – $2,320 – $600*)................. 560

*Book value should not be reduced below $600, the residual value.
Prob. 10–4B

1.
Accumulated
Depreciation Depreciation, Book Value,
Year Expense End of Year End of Year
a. 1 $24,000* $ 24,000 $107,250
2 24,000 48,000 83,250
3 24,000 72,000 59,250
4 24,000 96,000 35,250
5 24,000 120,000 11,250
*[($131,250 – $11,250)/5]
b. 1 $52,500 [$131,250 × (1/5) × 2] $ 52,500 $78,750
2 31,500 [$78,750 × (1/5) × 2] 84,000 47,250
3 18,900 [$47,250 × (1/5) × 2] 102,900 28,350
4 11,340 [$28,350 × (1/5) × 2] 114,240 17,010
5 5,760 [$131,250 – $114,240 – $11,250] 120,000 11,250

2. Cash.................................................................................. 21,500
Accumulated Depreciation—Equipment...................... 114,240
Equipment................................................................... 131,250
Gain on Sale of Equipment....................................... 4,490*
*($21,500 – $17,010)

3. Cash.................................................................................. 12,500
Accumulated Depreciation—Equipment...................... 114,240
Loss on Sale of Equipment............................................ 4,510*
Equipment................................................................... 131,250
*($17,010 – $12,500)
Prob. 10–5B
2008
Jan. 6 Delivery Equipment....................................................... 24,000
Cash........................................................................... 24,000

July 19 Truck Repair Expense................................................... 500

Cash........................................................................... 500

Dec. 31 Depreciation Expense—Delivery Equipment.............. 12,000

Accumulated Depreciation—Delivery Equipment
12,000
Delivery equipment depreciation
[$24,000 × (1/4 × 2)].

2009
Jan. 2 Delivery Equipment....................................................... 69,000
Cash........................................................................... 69,000

Aug. 1 Depreciation Expense—Delivery Equipment.............. 3,500

Accumulated Depreciation—Delivery Equipment
3,500
Delivery equipment depreciation
[$24,000 – $12,000 × (1/4 × 2) × 7/12].

1 Accumulated Depreciation—Delivery Equipment...... 15,500

Cash................................................................................. 10,250
Delivery Equipment.................................................. 24,000
Gain on Sale of Delivery Equipment...................... 1,750

Oct. 24 Truck Repair Expense................................................... 415

Cash........................................................................... 415

Dec. 31 Depreciation Expense—Delivery Equipment.............. 27,600

Accumulated Depreciation—Delivery Equipment 27,600
Delivery equipment depreciation
[$69,000 × (1/5 × 2)].
Prob. 10–5B Concluded
2010
July 1 Delivery Equipment....................................................... 70,000
Cash........................................................................... 70,000

Oct. 1 Depreciation Expense—Delivery Equipment.............. 12,420

Accumulated Depreciation—Delivery Equipment 12,420
Delivery equipment depreciation
[$69,000 – $27,600 × (1/5 × 2) × 9/12].
1 Cash................................................................................. 25,000
Accumulated Depreciation—Delivery Equipment...... 40,020
Loss on Sale of Delivery Equipment........................... 3,980
Delivery Equipment.................................................. 69,000

Dec. 31 Depreciation Expense—Delivery Equipment.............. 8,750

Accumulated Depreciation—Delivery Equipment 8,750
Delivery equipment depreciation
[$70,000 × (1/8 × 2) × 1/2].

Prob. 10–6B

1. a. $1,170,000/4,500,000 board feet = $0.26 per board foot; 1,370,000 board

feet × $0.26 per board foot = $356,200
b. Loss on impairment of goodwill, $5,000,000
c. $234,000/12 years = $19,500; 3/4 of $19,500 = $14,625

2. a. Depletion Expense..................................................... 356,200

Accumulated Depletion....................................... 356,200
Depletion of timber rights.
b. Loss on Impairment of Goodwill.............................. 5,000,000
Goodwill................................................................ 5,000,000
c. Amortization Expense—Patents.............................. 14,625*
Patents................................................................... 14,625*
Patent amortization.
*($234,000/12 years) = $19,500; $19,500 × 3/4 = $14,625
 SPECIAL ACTIVITIES

Activity 10–1

It is considered unprofessional for employees to use company assets for

personal reasons, because such use reduces the useful life of the assets for
normal business purposes. Thus, it is unethical for Esteban Appleby to use
Summerfield Consulting Co.'s computers and laser printers to service his part-
time accounting business, even on an after-hours basis. In addition, it is
improper for Esteban’s clients to call him during regular working hours. Such
calls may interrupt or interfere with Esteban’s ability to carry out his assigned
duties for Summerfield Consulting Co.

Activity 10–2

You should explain to Faye and Pat that it is acceptable to maintain two sets of
records for tax and financial reporting purposes. This can happen when a
company uses one method for financial statement purposes, such as straight-
line depreciation, and another method for tax purposes, such as MACRS
depreciation. This should not be surprising, since the methods for taxes and
financial statements are established by two different groups with different
objectives. That is, tax laws and related accounting methods are established by
Congress. The
Internal Revenue Service then applies the laws and, in some cases, issues
interpretations of the law and congressional intent. The primary objective of the
tax laws is to generate revenue in an equitable manner for government use.
Generally accepted accounting principles, on the other hand, are established
primarily by the Financial Accounting Standards Board. The objective of
generally accepted accounting principles is the preparation and reporting of true
economic conditions and results of operations of business entities.
You might note, however, that companies are required in their tax returns to
reconcile differences in accounting methods. For example, income reported on
the company’s financial statements must be reconciled with taxable income.
Finally, you might also indicate to Faye and Pat that even generally accepted
accounting principles allow for alternative methods of accounting for the same
transactions or economic events. For example, a company could use straight-
line depreciation for some assets and double-declining-balance depreciation for
other assets.
Activity 10–3
1. a. Straight-line method:
2008: ($200,000/5) × 1/2........................................................................ $20,000
2009: ($200,000/5)................................................................................. 40,000
2010: ($200,000/5)................................................................................. 40,000
2011: ($200,000/5)................................................................................. 40,000
2012: ($200,000/5)................................................................................. 40,000
2013: ($200,000/5) × 1/2........................................................................ 20,000

b. MACRS:
2008: ($200,000 × 20%)......................................................................... $40,000
2009: ($200,000 × 32%)......................................................................... 64,000
2010: ($200,000 × 19.2%)...................................................................... 38,400
2011: ($200,000 × 11.5%)...................................................................... 23,000
2012: ($200,000 × 11.5%)...................................................................... 23,000
2013: ($200,000 × 5.8%)........................................................................ 11,600
Activity 10–3 Continued

2.

a. Straight-line method Year

2008 2009 2010 2011 2012 2013
Income before depreciation.......... $500,000 $500,000 $500,000 $500,000 $500,000 $500,000
Depreciation expense.................... 20,000 40,000 40,000 40,000 40,000 20,000
Income before income tax............. $480,000 $460,000 $460,000 $460,000 $460,000 $480,000
Income tax....................................... 192,000 184,000 184,000 184,000 184,000 192,000
Net income...................................... $288,000 $276,000 $276,000 $276,000 $276,000 $288,000

b. MACRS Year
2008 2009 2010 2011 2012 2013
Income before depreciation.......... $500,000 $500,000 $500,000 $500,000 $500,000 $500,000
Depreciation expense.................... 40,000 64,000 38,400 23,000 23,000 11,600
Income before income tax............. $460,000 $436,000 $461,600 $477,000 $477,000 $488,400
Income tax....................................... 184,000 174,400 184,640 190,800 190,800 195,360
Net income...................................... $276,000 $261,600 $276,960 $286,200 $286,200 $293,040
Activity 10–3 Concluded

3. For financial reporting purposes, Mike should select the method that
provides the net income figure that best represents the results of operations.
(Note to Instructors: The concept of matching revenues and expenses is
discussed in Chapter 3.) However, for income tax purposes, Mike should
consider selecting the method that will minimize taxes. Based on the
analyses in (2), both methods of depreciation will yield the same total
amount of taxes over the useful life of the equipment. MACRS results in
fewer taxes paid in the early years of useful life and more in the later years.
For example, in 2008 the
income tax expense using MACRS is $184,000, which is $8,000 ($192,000 –
$184,000) less than the income tax expense using the straight-line
depreciation of $192,000. Lonesome Dove Construction Co. can invest such
differences in the early years and earn income.

In some situations, it may be more beneficial for a taxpayer not to choose

MACRS. These situations usually occur when a taxpayer is expected to be
subject to a low tax rate in the early years of use of an asset and a higher tax
rate in the later years of the asset’s useful life. In this case, the taxpayer may
be better off to defer the larger deductions to offset the higher tax rate.

Activity 10–4

Note to Instructors: The purpose of this activity is to familiarize students with the
differences in cost and other factors in leasing and buying a business vehicle.

Activity 10–5

Note to Instructors: The purpose of this activity is to familiarize students with the
procedures involved in acquiring a patent, a copyright, and a trademark.
Activity 10–6
Revenue
a. Fixed Asset Turnover = Average Book Value of Fixed Assets

$348,650
Wal-Mart: $83,865 = 4.16

$30,379
Alcoa Inc.: $14,495 = 2.10

$24,966
Comcast Corporation: $20,009 = 1.25

b. The fixed asset turnover measures the amount of revenue earned per dollar
of fixed assets. Wal-Mart earns $4.16 of revenue for every dollar of fixed
assets, while Alcoa only earns $2.10 and Comcast Corporation only earns
$1.25 in revenue for every dollar of fixed assets. This says that Alcoa and
Comcast require more fixed assets to operate their businesses than does
Wal-Mart, for a given level of revenue volume. Does this mean that Wal-Mart
is a better company? Not necessarily. Revenue is not the same as earnings.
More likely, Wal-Mart has a smaller profit margin than do Alcoa and Comcast.
Although not required by the exercise, the income from operations before tax
as a percent of sales (operating margin) for the three companies is: Comcast,
14.3%, Alcoa, 9.9%, and Wal-Mart, 5.3%. Thus, the difference between the
fixed asset turnovers seems reasonable. Generally, companies with very low
fixed asset turnovers, such as aluminum making and cable communications,
must be compensated with higher operating margins.

Note to Instructors: You may wish to consider the impact of different fixed
asset turnover ratios across industries and the implications of these
differences. This is a conceptual question designed to have students think
about how competitive markets would likely reward the low fixed asset
turnover companies for embracing high fixed asset commitments.